Prior to the financial crisis, Olstein, who founded Olstein Capital Management in 1995, had an impressive track record of profiting on stocks he bought during a time of turmoil. He purchased oil-related stocks at the height of the Asian crisis and bought property-and-casualty insurance companies after Sept. 11, 2001. Bank stocks seemed no different -- until Lehman Brothers. The
Olstein All Cap Value Fund
(OFALX) fell 43.8% in 2008. "I've been in the industry 44 years and have never, ever gotten clocked like this," Olstein recalls.

Financial stocks have been nothing short of career killers for some value managers. Many grossly underestimated the breadth and depth of their problems. But the sector has rallied this year, up 22%, and many managers are starting to take a closer look. Barron's talked with several widely respected value managers to see what they're finding.

ONE OF THEM, Wally Weitz, isn't finding much. "In a world where the Fed is printing money and you can get mortgages for 4%, it seems like their relative bargaining power will be depressed for a while, leading to a lower return on equity," says Weitz, who co-manages the
Weitz Partners Value
fund (WPVLX). Though he thinks the worst is over, he continues to mainly avoid the sector. One exception has been top holding
Wells Fargo WFC -0.4815133276010318%Wells Fargo & Co.U.S.: NYSEUSD57.87
-0.28-0.4815133276010318%
/Date(1438376434346-0500)/
Volume (Delayed 15m)
:
11754304AFTER HOURSUSD57.79
-0.08-0.13824088474166235%
Volume (Delayed 15m)
:
615530
P/E Ratio
14.14914425427873Market Cap
297752729807.068
Dividend Yield
2.592016588906169% Rev. per Employee
345142More quote details and news »WFCinYour ValueYour ChangeShort position
(WFC), which Weitz held through much of the financial crisis, sold in 2009 then bought again last year. "Wells has been a comfortable place to hide for people who feel they want to, or have to, own banks," says Weitz. But at today's $35 per share, he says, "it's not exciting anymore."

That said, Nygren has raised the bar on how he values bank stocks and says he does think that fundamentals have improved. "The lending standards before [the crisis] versus now are like night and day," he says. "And the biggest asset they're lending against, the nation's housing stock, is increasing in value."

Nygren agrees that banks don't warrant the kinds of valuations they were getting before the crisis -- in many cases, two times book value. But he thinks they're now a bargain at 50% to 75% of book value. "The bears are saying banks are getting overregulated and will become like utilities," says Nygren. "But look where banks are today versus utilities. If banks look like utilities on those metrics, they would be a fantastic investment."

The Great Value Debate

These noted value funds have different approaches to the still-confounding financial sector.

% In

Fund/Ticker

Financials

1-yr

5-yr

10-yr

Prospector Opportunity/POPFX

41%

22.7%

6.0%

N/A

GoodHaven/GOODX

34

24.5

N/A

N/A

Oakmark/OAKMX

23

30.4

4.1

8.3%

Weitz Partners Value/WPVLX

15

28.2

2.6

7.8

Olstein All Cap Value/OFALX

10

25.8

-2.3

6.2

Returns as of 9/30. N/A = Not Applicable. Source: Morningstar

THE LONGTIME VALUE MANAGERS at Prospector Funds, meanwhile, eschew the handful of large banks most of the market fixates on, instead choosing from the thousands of smaller insurers, thrifts, and community banks that operate in a more manageable world and with a fraction of the leverage. They've had a heavy stake in small and medium-size financial companies since they launched their
Prospector Opportunity fund
(POPFX) in 2007. "In 2008, our financials actually outperformed our other holdings," says manager Kevin O'Brien. The beauty of investing in regional institutions, he adds, is the ability to handpick areas with strong or improving economies and housing markets. This led them to the likes of
Oritani Financial ORIT -0.12714558169103624%Oritani Financial Corp.U.S.: NasdaqUSD15.71
-0.02-0.12714558169103624%
/Date(1438376400203-0500)/
Volume (Delayed 15m)
:
139567AFTER HOURSUSD15.71
%
Volume (Delayed 15m)
:
1512
P/E Ratio
16.38164754953076Market Cap
691428537.979584
Dividend Yield
4.455760661998727% Rev. per Employee
590682More quote details and news »ORITinYour ValueYour ChangeShort position
(ORIT) in New Jersey and
Chicopee BancorpCBNK -2.4881516587677726%Chicopee Bancorp Inc.U.S.: NasdaqUSD16.46
-0.42-2.4881516587677726%
/Date(1438371976060-0500)/
Volume (Delayed 15m)
:
2084
P/E Ratio
44.486486486486484Market Cap
86760653.6672974
Dividend Yield
1.9441069258809234% Rev. per Employee
208954More quote details and news »CBNKinYour ValueYour ChangeShort position
(CBNK) in Massachusetts.

While skeptics point to regulatory pressures as a reason to stay away from banks, the Prospector team sees the benefits. Not only do highly regulated industries provide additional opportunity for scrutiny, they're fertile grounds for mergers and acquisitions.

Keith Trauner and Larry Pitkowsky also see value in staying away from the behemoths. The duo launched the
GoodHaven Fund
(GOODX) in April 2011, after leaving Bruce Berkowitz's
Fairholme Fund
(FAIRX). While Berkowitz wagers on big financials -- they were recently 77% of his portfolio -- the GoodHaven managers are following a different tack, favoring niche firms, such as
Federated InvestorsFII -1.0566480774875258%Federated Investors Inc.U.S.: NYSEUSD33.71
-0.36-1.0566480774875258%
/Date(1438376729252-0500)/
Volume (Delayed 15m)
:
409595AFTER HOURSUSD33.71
%
Volume (Delayed 15m)
:
P/E Ratio
22.624161073825505Market Cap
3527448141.763
Dividend Yield
2.966478789676654% Rev. per Employee
615778More quote details and news »FIIinYour ValueYour ChangeShort position
(FII), known for its money-market and other short-term funds, or the relatively small investment bank and asset manager
Jefferies Group
(JEF). "It's not that we think everyone is wrong or there isn't money to be made," says Trauner. "But we're more interested in things we can get our arms around. People inside those large banks don't even know how to value them."

The Bottom Line

Financial stocks have rebounded nicely from their lows, but despite the run-up, many value managers are still finding opportunity -- and keeping their fingers crossed.

Four years after getting burned on financials, Olstein hasn't forgotten the lessons he learned. As he sees it, his firm made two huge mistakes -- overweighting these stocks and underestimating their potential to reverse quickly and dramatically. "When you make a mistake on a leveraged business model, you pay dearly," he says.

With that in mind, Olstein instituted a new rule: "We stop buying at 1% [of fund assets] and put no more than 10% of the portfolio in leveraged businesses."